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I did install XP Mode for Windows 7. I then installed Outlook 2007 on it. Because Outlook 2007 is installed within the XP Mode VHD file, it is self contained within that virtual instance. So to answer my original question, is YES, this works.

I now can use either Outlook 2010 from my native Win 7 install or Outlook 2007 (with legacy plug-in) via XP mode and all works as expected.

That is exactly what XP Mode is for...
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ta.speot.isMay 11 '10 at 3:42

Correct. When I asked the question, I didn't realise XP Mode was just a glorified term for "virtual hard disk with Win XP". I thought the actual software was going to be installed on my host machine. All good.
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LordHitsMay 11 '10 at 15:52